House Prices and The Generation Gap

July 16th, 2007 | house prices-

Rising house prices have given tremendous joy to a generation of home owners. Those who bought house prices back in the 1970s have seen their investment rise faster than inflation, earnings, the stock market and most people’s wildest expectations. (253% increase since 1993) [i]

These rise in house prices have given significant benefits to this generation of home owners.

1. Scope for equity withdrawal and increased consumer spending.
2. Wealth gains which can be used for retirement savings.
3. Higher consumer confidence
4. Insulated from rising interest rates

The older generation are mostly insulated from rising interest rates. For example, the average house price is now around the £200,000 mark. In 1980, the equivalent average house price was around £25,000.

Therefore, for a homeowner with a 30 year mortgage, mortgage repayments on a £25,000 mortgage are going to be relatively small as a % of income (£142 a month as opposed to £1,000)

Yet, despite these advantages, many homeowners have not been able to fully realise the equity of their house because they have been unwilling to remortgage their house. Nethertheless, it is nice to be able to have the option of Remortgaging, if necessary.

Difficulties of First Time Buyers

First time buyers, on the other hand, are facing a real financial struggle to get on the property ladder. According to Payfinder the average income in the UK is £22,411
The average house price is £181,810 (Nationwide survery).
This means the average house price to income now stands at 8 times. A report by
National Housing and Planning Advice Unit (NHPAU) say that this multiple could increase to 10 times by the end of 2026. Over a third of first time buyers feel they will never get on the property ladder.

Cost of mortgage repayments.

Many are making sacrifices to get on the property ladder. This involves

Interest only mortgages
50 year mortgage
borrowing a deposit of parents.
Self certification mortgages.
Borrowing higher income multiples making them more susceptible to mortgage defaults.

The effect of this is that mortgage payments as a % of income are increasing at a faster rate than ever before. They now stand at an average of 19.1% [2] However, for many first time buyers the % of disposable income spent on mortgages can reach upto 50%. This makes them very susceptible to any rise in interest rates.
The problem is that higher interest rates haven’t been affecting consumer spending equally. People who have paid off their mortgage may see little impact of rising interest rates, instead they keep spending. It is possible to have a rise in mortgage defaults without actually reducing inflation

Cost of Renting.

For those who cannot afford to buy a house in the UK, the alternative is little better. Renting has not increased by the same rate as buying a house, but it still is very expensive and leaves no one any better off.

Related

References

[i] House prices at Nationwide

[1] House prices at 10 times income
[2] House Prices at Guardian